“ITS DÉJÀ VU ALL OVER AGAIN”…Yogi Berra And sure enough, the downward trading of Mortgage Bonds and upward trend of home loan rates during September looks like an exact replay of July’s poor performance. Why are Bond prices being pressured still lower, causing home loan rates to rise .125% just last week? It’s due to fears over inflation. Inflation is the arch enemy of Bonds because it erodes their value over time. Bondholders get a fixed payment as interest for their investment. But higher inflation eats away at the buying power of those fixed payments, so bondholders demand higher rates to compensate them when inflation rises.

What’s been sparking the latest fears over inflation? Concerns have been raised about the inflationary impact of Hurricanes Katrina and Rita, after the federal government basically stated it will write blank checks for reconstruction. There will be some major pork heading out of Washington DC to New Orleans and the rest of the Gulf Coast…and ultimately somebody is going to have to pay for it. Additionally, manufacturing numbers have been bouncing much higher, which could lead to an inflationary economy. And if that weren’t enough, the latest Gross Domestic Product Report showed signs of inflation as well.

All the inflation talk last week overshadowed some softer housing numbers. After posting the best numbers in 32 years during the previous month, the latest report on homes waiting to be sold was significantly weaker than expectations. While one report could easily be an anomaly, it should be closely watched in the future to see if this could be the first chink in the armor of the mighty housing market.

A NEW TAX RULING JUST HIT THE WIRES…AND COULD MEAN SOME REAL CASH IN YOUR POCKET. IF YOU HAVE REFINANCED YOUR HOME LOAN LATELY OR KNOW ANYONE THAT HAS…READ THIS WEEK’S MORTGAGE MARKET VIEW TO LEARN ABOUT A NEW TAX WRITE OFF THAT COULD SAVE A BUNDLE AT TAX TIME.

With all this talk about inflation forcing Bond prices lower and home loan rates higher, the stage is now set for another battle. A look at the chart below shows that Mortgage Bonds are clearly on a “Down Escalator”, just like they were in July. But look at where the last slide was halted – at the exact price Mortgage Bonds closed at last Friday. Can Bonds remain above this line in the sand? A break below this marker would put Bonds at their worst levels in over six months and push home loan rates higher still.

The deciding factor on the direction of home loan rates ahead may just come on Friday, when the latest Jobs Report will be released. The report is often volatile, but due to the effects of the hurricanes, this month’s report could add more drama. The current consensus estimate calls for a loss of 172,000 jobs but this could change daily until the report is released. No one really has a good handle on what the number will be, so Friday could be a wild day for the markets. But overall, the path of least resistance for home loan rates appears to be higher.

"An economy breathes through its tax loopholes." ~ Barry Bracewell-Milnes

Refinanced already this year? Planning to spruce up your home with a few improvements? Or is purchasing an additional piece of property part of your holiday wish list? Take a look at your financing, as making a few smart choices could provide an additional tax write off for 2005.

Traditionally, the rule of thumb has been that writing off “points” (one point equals 1% of the loan amount) paid for a home loan only applied to a purchase transaction. If an individual paid points in connection with a refinance transaction, the points could not be deducted in one lump sum, but instead amortized over the term of the loan. For example, if you refinanced a $300,000 30-year mortgage and paid one point, the $3,000 would have to be spread out over the 30-year term. The deductible amount would be 1/30th each year or $100 per year. If your tax bracket were 33%, the tax savings would be a measly $33 per year. However, if the entire $3,000 could be written off in the tax year paid and not spread out over the term of the loan, the tax savings could increase significantly from $33 to $990 ($3,000 X 33% = $990).

A recent tax court case may provide just that loophole and allow you to write off points paid on a refinance transaction. Here’s the scoop.

In a recent case brought before the United States Tax Court (Hurley 2005-125), the court ruled that the points paid for refinancing a property were tax deductible due to certain criteria being met by the Hurley’s. The case was brought to the Tax Court with the argument that the points paid for the home loan allowed the Hurley’s to obtain a lower rate, which resulted in a lower home loan payment. The monthly payment savings were in turn used for improvements to the property, including a new roof, carpet, and other repairs. Being that the Hurley’s provided documented proof of the improvements, the court ruled in their favor and allowed the points to be deducted from the Hurley’s taxes…all in the year the loan was refinanced.

It is important to note that if you pay points to refinance a personal property, the points are only tax deductible if the refinance creates a lower home loan payment and the savings will be used for improvements to the property; or if the refinance transaction is being done to purchase an additional property. And as always, consult your mortgage and tax professional regarding your own specific situation to ensure that you meet the criteria needed for a deduction of this type.

Two potentially high impact reports begin and end this week's economic calendar – the ISM Manufacturing Index on Monday, and the often-volatile Jobs Report on Friday. Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of October 03 – October 07